For anybody who didn't catch the hint, another banking crisis the continuation of the banking crisis is inevitable. I've said it before, Is Another Banking Crisis Inevitable? This is the current landscape, undoubtedly fudged over by optimistic marks.
Banks NPAs to total loans
Source: IMF, Boombust research and analytics
Euro banks remain weak as compared to their US counterparts
Health of European banks is weaker when compared to US banks. European banks are highly leveraged compared to their US counterparts (11.1x versus 4.1x) and are undercapitalized with core capital ratio of 6.5x vs. 8.5x. Also, the profitability of European banks is lower with net interest margin of 1.2% compared with 3.3%. However, non-performing loans-to-total loans for European banks are slightly better off when compared to US with NPL/loans at 4.9% vs. 5.6%. Nonetheless, considering the backdrop of high exposure to sovereign debt in Euro peripheral countries, we could see substantial write-downs for Euro banks AFS and HTM portfolio, which would more than offsets the relative strength of loan portfolio.
I really do mean substantial!
Ireland has been one of the weakest points in the EU from a financial standpoint, and is well positioned to quickly and efficiently transmit contagion to its economic and geographic neighbors. I have been warning about Ireland for well over a year now and things are unraveling pretty much as I anticipated. Our modeling and research should have left all interested parties quite prepared. Going through the BoomBustBlog warnings in chronological order as excerpted from the Pan-European Sovereign Debt Crisis series...
- Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
- Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
- Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe
- Beware of the Potential Irish Ponzi Scheme!
- Ireland’s Bailout Is Finalized, The Indebted Gets More Debt As A Solution But The Fine Print Is Glossed Over – Caveat Emptor!
Amsterdam's VPRO Backlight and Reggie Middleton on brutal honesty, destructive derivatives and the "overbanked" status of many European sovereign nations
Check out the screen shots below from Bloomberg.com yesterday. Whoa!!! What happened? How did we get here? Let's just keep in mind that what may look like analytical/intellectual superiority on my part in comparison with to the literal army of Wall Street analysts and pundits may actually simple end up being intellectual honesty and a dearth of truth destroying conflicts of interests. Then again, it does make me feel good to say that I may be smart, doesn't it?
Many people ask me for investing advice, something that I am quite reticent to give over casual conversation. There is one aspect that I do offer freely though, and that is the push for the return of common sense. When people ask me what sectors to invest in, and whether banks are a potentially good buy or not, I remind them that buying stocks for the longer term is no different than buying a chunk of any business. The question is, "Is this a good business prospect?".
Just imagine if I came up to you and pitched my business for an investment along the lines of the following...
"Listen, Dude! I have this big banking business that does several billion dollar per year. It is very sensitive to the business cycle and as you know, Tim Geithner and Ben Bernanke - two of the smartest and most honest people this universe has ever experienced - says that the worst is behind us and the economy is growing. Hey, even the NAR says that we should buy a house now, and they have those high falutin' fancy economists to crunch numbers for them. So, with that being said, all you have to do is look past the fact that I had to get bailed out by the government several times to the tune of many billions of dollars. My lawyers may also want me to disclose that some smart ass investor/blogger types say that we are coming off a high in the business cycle, but we have Optimism Driven Reduction of Risk Reserve due to our very rosy outlook. Due not be deterred by the fact that the collateral behind our loans has depreciated by as much as 42% and is still on the downfall. I know that blogger/investor guy that is starting to get a few seconds of airplay says we are in a Real Estate Depression That Is About To Get Much Worse, but truth be told, it's really a matter of semantics. A depression is generally a 20% drop in values surround by severely depressed economic activity. We are experiencing 40%+... See! The numbers don't match. It ain't a depression! What that blogger dude fails to realize is that my whole industry is under the protection of the US gubment - that's right, we are directly indemnified by .GOV. In case you didn't get the memo, FASB Appears to Have Bent Over For The Final Time & Accuracy In Financial Reporting Dies An Ignominious Death!!!
We have put out record profits, as the government supports our paying out that vast majority of what should be retained earnings as salary, bonus and other unearned compensation. As a matter of fact, the government has actually funded this exercise with tax payer dollars! I'm telling you man, this is the best gimmick since that PT Barnum guy and his snake oil. There's an ass for every seat." [continue reading up on this topic, for it is highly illuminating. Of course, it doesn’t end there. After all, Buried Deep Within The Files That The Federal Reserve Released On Their MBS Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks]
Does this sound like a sound investment to you?
Primarily Dealer Credit Facility
Note: Paying subscribers may download the fully scrubbed model containing all of the date output by the Fed regarding the PDCF as an Excel pivot table here, Primarily Dealer Credit Facility Analysis. Those who are interested in subscribing to our research should click here.
Yesterday, I illustrated how the Fed buried TARP 2.0 amongst a spreadsheet dump of over 70,000 trades and what amounted to probably a million cells of spreadsheet data distributed among a plethora files, see Buried Deep Within The Files That The Federal Reserve Released On Thier MBS Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks!. Today, we will review another one of those files, dealing with the lending program that the Fed instituted for its Primary Dealer banks.
About a year ago, after hearing so many pie-in-the-sky perma-bullish pundits and bankers say how banks paid every cent of TARP and government assistance back, I went on the following rant - 10 Ways to say No, the Banks Have Not Paid Back Their Bailout from the Taxpayer! Monday, January 18th, 2010:
Yes, some of the banks repaid TARP, with interest and warrants. Okay. The investment big banks (that were still in existence) were offered expedited financial holding company (bank) charters. That is why they didn’t fail, at least in part. So, running down the list, the banks paid back TARP. That’s a +, but….
- What was the value for bank charter, to get cheap access to the Fed’s funds? did they pay back this value yet? No!
- How about the payment of interest on the banks’ excess reserves at the Fed. Have the banks repaid that yet? No!
- The Fed and the Treasury have purchased hundreds of billions of dollars of Agency debt, Agency mortgage-backed securities (MBS) and related securities through Treasury purchase programs. Have the banks paid back the capital behind those purchases yet? No!
- How about the Term Auction Facility? Has the capital behind the benefits of that program been paid back? No!
- Then there is the Primary Dealer Credit Facility (PDCF), has this been paid back? No!
- Do you remember the Term Asset-Backed Securities Loan Facility (TALF)? Have the funds behind that been paid back? No!
- What about the PPIP? No!
- Hey, there’s the Foreign Exchange Swap programs (the currency swap lines, that saved not only our banks but out banks facing counterparties who were short on dollars), has that been paid back? No!
- There’s the Commercial Paper Funding Facility (CPFF), have the funds behind that been paid back? No!
- Most importantly, the opportunity cost of ZIRP, which hurts those who do not speculate (or have not speculated) with near free money! How do you pay that back to grandma and her .017% CDs?
Well, all rants aside, if you bothered to go through the mass dump of data that the Fed produced as a result of the Bloomberg FOIL suit, you will find that not only did the banks not pay back the massive amount of assistance that was given to them, they were actually granted more in the form of MOPTARP (MBS Overpayment Troubled Asset Repayment Program), and yes, I did make that up. How much more? Well, potentially more than the original TARP bailout! I'm getting ahead of myself though, so let's backtrack.
I feel this month has thrown enough events at the market to force it to start taking the real fundamentals into consideration. Of course, battling this ideal is the US Federal Reserve and their QE 2.1 policy. This should be a time to reflect upon exactly where we stand thus, I will review my thoughts and observations over the last 30 to 45 days and then summarize a truly unbiased and independently calculated view of the downright nasty side effects of the US shadow inventory of distressed housing. All paying subscribers can download the full shadow inventory report here: Foreclosures & Shadow Inventory. Professional and Institutional subscribers should also download the accompanying data and analysis sheet in Excel - Shadow Inventory.
Over the last few weeks, I have commented on my belief that the big banks who optimistically release reserves and provisions to pad lagging accounting earnings under the auspices of increasing credit metrics are simply setting their investors up for a major reversal which will bang those very same accounting earnings: JP Morgan’s 3rd Quarter Earnigns Analysis and a Chronological Reminder of Just How Wrong Brand Name Banks, Analysts, CEOs & Pundits Can Be When They Say XYZ Bank Can Never Go Out of Business!!! and As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves).
Here is a presentation using readily available data from the Federal Reserve and BoomBustBlog illustrating what clearly shows we have not come anywhere near the peak of the economic downturn IF you believe that real asset prices, economic housing activity and bank lending and available credit are gauges of, and effect, economic health.
Since the loan peak of 7.3227 trillion for week ending 10-22-08, total loans and leases at banks have dropped over 500 billion dollars. That big spike on April 1st was due to an FASB rule change that forced some 452 or so billion in off-balance sheet stuff back on their books. Basically, this was not new lending, it was lending that was held off balance sheet. Despite the stimulus that was supposed to increase lending, the current total loans and leases is now at 6.7889 trillion. This is a drop of $533.8 billion. Not counting the +452 to 515 billion resulting from that rule change, the drop is ~1,000 billion. In other words, we've had total loan retraction in the amount of nearly a trillion dollars since the bailout - green shoots, end of the recession, no chance of a double dip (because we never left the first one) and all. Unbelievable.
It has come to my attention that several banks have actually blocked rank and file level access to my blog through their intranet. That, my dear friends, is asinine, and does nothing but engender distrust. While I admit I can be rather flamboyant in my writings, I am nonetheless quite fair. In addition, my opinions are analytically driven, by design. Thus, if you have a differing opinion all you really need to do is challenge me with the facts. One of us will be proven to be right, or at the very least it will be shown to all how we came to our conclusions. I have absolutely no problem admitting when I am wrong or have made a mistake. I have been right long enough and often enough that I have plenty of emotional and even egotistical room for error. I know fully that no one is perfect, and while I would much rather catch any error first, before a third party does it (particularly a dissenting third party) I know that things don't always happen that way.
A commenter had a very intelligent dissent against my Goldman Sachs post on Zero Hedge the other day. While cogent, eloquent and very lengthy, it was still wrong but it definitely exemplified what a bank (or any other entity) should do when they feel that I am not in the right. Of course, if you put yourself out there, there is always the risk that you can be proven wrong as well. Believe it or not, and contrary to what you marketing and PR advisers may tell you - it is alright. As a matter of fact, it is actually good sometimes. You see, to many of the people that matter, it is not only acceptable, it is expected that you will not be right all of the time. Anybody who is right all of the time should be held up to a much higher level of scrutiny. Just ask Bernie Madoff. The true test of character and fortitude is to be able to publicly admit when you have made a boo-boo, and be willing to do something about it. That goes a lot farther in my eyes, than abject perfection. This is a lesson that the global and national banking industry in the US has yet to learn.
On that note, let's go over a few emails that I have received recently...
Reggie Middleton with Max Keiser on the Keiser Report and RTT Television
Go to 12:20 in the video to see the portion with Reggie Middleton
The topics in this interview stem from the post Four Facts That BANG JP Morgan That You Just Won’t Hear From The Sell Side!!!
On the difference between accounting earnings and economic earnings...
... accountants have not been – and currently are not, trained in the economic realities of corporate valuation. They are trained to tabulate business operations data. There is a marked and distinct difference. That difference is as stark as night and day for investors, yet despite this stark difference, Wall Street still reports corporate performance metrics strictly in accounting terms, and the media (both mainstream and the more specialized financial media) simply follow suit. Hence we hear much about easily manipulable and manageable accounting earnings, revenues, operating margins, earnings per share, etc. These measures are highly flawed in a variety of ways, with the primary flaw being that they do not account for the efforts both required and undertaken to achieve them. Basically, they measure JUST HALF (and coincidentally, the positive half may I add) of the risk/reward equation that should be at the root of every investors move. Long story short, they do not account for, nor do they EVEN RESPECT, the cost of capital. This concept ties in closely with Chairman Bernanke’s current course of action as well as the ZIRP discussion later on this missive demonstrates (capital offered at zero cost causes reckless abandonment of risk management principles which eventually causes crashes – yes, more crashes). Acknowledgment of the cost of capital enforces a certain discipline on both corporate management and investors/traders. Without respect for such, it is much too easy to create and portray a scenario that is all too rosy, since we are only looking at rewards but never bother to glance at the risks taken to achieve said rewards. I reviewed this concept in detail as it relates to bonuses and compensation on Wall Street in The Solution to the Goldman (and by Extension, the Securities Industry) Compensation Dilemma.